Dr. Rajiv C.
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Articles : Trading / Financial
REVERSE RATIO BACK-SPREADS
OF REVERSE RATIO BACK-SPREADS OPTIONS STRATEGY ESPECIALLY IN INDIAN MARKETS.
Use of Reverse Ratio Back-spreads Options Strategy can be more advantageous
if you are using any trading method that is Time (Turning Dates) based
The Classical way is to Buy Calls or Puts: It has following practical
problems especially in India.
1. As you must have noticed that in India the options are relatively high
2. Long Term Options though not as volatile as Short Term ones are very less
Liquid and are also having wider Bid/Ask.
3. Hence we are forced to use relatively Short Term Options mainly. (Though
I always prefer to play with just next month ones) However those who are
trading options in India must have noticed that Option buyers need to be
very fast in taking the profits whenever the move does occur as anticipated.
If one is not fast enough then that virtual profit is seen melting fast
right in-front of you! There may be some unavoidable circumstances such as
Loss of Net Connection or you are attending some urgent Tel Call, Guest etc.
I always wished (but in vain) that the speed of market should be a bit
slower to allow me to take my positions after thinking!
To overcome the above problems one may try following ...
Spreads Bull Spread / Bear Spread etc.: But
there is Problem with this classical method too. One would notice that in
Indian markets these spreads rarely help as invariably the cheaper OTM
option is running too fast to close the entire position profitably. We do
not have proper Spread Trading facility as in other countries. Another
Problem is that invariably in the middle of the Futures Expiry Period is the
Market Swing Turning Date and hence you may not be able to wait till expiry
without loosing some profit of the spread.
2. Use of Reverse Back-spreads: I
have found this method works out better in following aspects (especially
when done with just next available month options) ...
First I will explain in short what this is to those readers who are not
acquainted with these.
When you want to go long: Buy More number of just out of money or at the
money Calls and Sell Lesser number of in the money Call/s. e.g. : Buy two
5300 Calls and Sell one 5200 Call
When you want to go short: Buy More number of just out of money or at the
money Puts and Sell Lesser number of in the money Put/s. e.g. : Buy two 5200
Puts and Sell one 5300 Put
1. It slows down the speed and urgency in closing the position once
2. Gives advantage in option time decay.
3. Gives you a choice to reverse the direction along with profit booking by
simply closing one trade.: I will explain this.
a. Suppose you are long and you do not wish to go short but just book profit
then you need to close all 3 positions.
b. But you are long and you wish to book profit and go short immediately
then you can simply sell 1 Call and convert this Reverse Ratio Back-spreads
Options Strategy into Short Strategy of Call Credit Spread.
4. Much Lesser expensive than simply Single Direction Option Buying.
5. You will observe that even if you go wrong in your direction and want to
exit generally it is possible with much lesser loss as 2:1 Price ratio is
remaining even 2-3 days near expiry.
6. It can be more adjustable if your trading is date based. Since I am
forecasting the turning dates and its likely amplitude astrologically, I try
to plan the trades and option price levels relatively better.
1. You must not wait too long especially if the market is at around your
sold option as the loss will be maximum if the market closes exactly at the
level of your sold option.
2. Since this is a hedged strategy Wind-Fall Gains can not be there.
Please watch the above method and if you find it worth then you may give it
a try though obviously at your own risk!
Dr. Rajiv Karekar